(Editor's note: This is the second in a series of weekly columns on retirement by Jim Cramer, founder of TheStreet, and Wally Konrad, former senior editor for Smart Money magazine. To read the first installment, click here.)
NEW YORK (
) -- Say you've become enamored with an Internet stock that's bound to benefit from the
Or maybe you want to add to your holdings of
after the great numbers it just put out.
Now say you want to stash these picks in your 401(k) account, convinced they'll give your nest egg the boost it needs.
Chances are, you're out of luck.
That's because only a fraction of employers let workers pick the investments they want. Instead, most employers give you a limited list of 10 to 20 funds -- many of them with limited performance to match -- usually in just one fund family.
A handful of enlightened employers offer what's called a self-directed brokerage window within their 401(k)s. With this tool, employees can buy mutual funds outside the company's picks, ETFs, stocks, bonds and just about any other investment not offered in their company's menu.
In other words, a brokerage window opens up hundreds, even thousands, of choices to a 401(k) investor.
But only about one in five employers surveyed offered a brokerage window, according to a 2009 study by Aon/Hewitt. Fidelity, a leading 401(k) provider, says that just 9% of the 20,000 employers it serves offer brokerage windows, and of those, 72% offer the ability to purchase individual stocks.
Employers' resistance probably stems from good intentions, but it's still misguided. Afraid the average 401(k) holder will trade too much and squander his or her nest egg, big companies want to protect investors from themselves.
Some critics have called picking stocks in 401(k)s akin to putting a loaded gun in investors hands or letting the inmates run the asylum.
And I certainly don't think you're crazy or dangerous if you're looking for maximum returns and wider diversification via individual stock picks in your retirement account.
The truth is, 401(k) investors don't become trigger-happy traders the minute they have a brokerage option.
According to research by Charles Schwab, the average number of trades the brokerage firm sees among 401(k) investors it serves is only 5.2 per year.
What's more, a Vanguard mutual fund company survey found that active retirement account traders achieved the same returns as buy-and-hold investors.
And consider this: Only 2% of employees with access to a 401(k) brokerage window actually use them, Fidelity found.
That's a good thing because it implies that only investors who know what they are doing are buying individual stocks in their 401(k)s.
"What we find is that more sophisticated investors who have confidence use this option," says Donna Norwood, senior vice president at Fidelity.
If that's the case, why don't all companies allow their employees this flexibility? Freedom could pay off in higher yields.
Providing a brokerage window for 401(k) members who want it and know how to use it along with good choices for buy-it-and-forget-it investors is a combination that can work well for all employees.
Investors who need help choosing and properly diversifying among the vast choices can enlist the services of an investment adviser who specializes in 401(k)s and other retirement accounts.
If you don't have a brokerage window option in your company retirement plan, in most cases you can fashion your own by opening a nondeductible IRA or Roth IRA and build your own portfolio of individual stocks to supplement the fund choices in your employee plan.
Whether you're investing in stocks through your company plan or your own retirement account, you don't want to jump in carelessly and prove the critics right.
That means no constant trading (you'll generate a bunch of fees that will eat into returns, among other problems) and a focus on stock choices you believe have long-term growth potential that will help fund your retirement.
Along those lines I like
( KFT) and
American International Group
. In fact, those are the stocks I'd buy for my own 401(k) -- if I could.
While you're at it, take a good look at asset class diversification. Individual stocks can help you diversify into asset classes such as real estate and energy that are often only slightly represented in the usual 401(k) fund picks.
I like oil driller
and forest products company
. Both have terrific yields.
Disclosure: At the time of publication, Cramer was long Walt Disney, Abbott Labs, Kraft Foods, American International Group, Ensco and Weyerhaeuser